INTEREST-RIBA: COMPARATIVE EXPOSITIONS

The Islamic finance and banking movement has grown to maturity and its efforts towards interest- free financial intermediation have been successful through the formation of Islamic banks and the openings of non-interest windows by conventional banks. This success is not limited to the Islamic faith but shared by other religious faith as well. It is a success for the interest free movement towards removing interest, which goes against the teaching of revealed religious, from economic and financial activities, on ethical grounds. This paper undertakes a comparative analysis on the religious prohibition of interest in revealed religions such as Judaism, Christianity and Islam, through content analysis of religious text and documentary examination of government budgetary allocations to debt servicing and social sector. The findings show that interest is not only harmful on religious basis but also reduces public budget available for social infrastructure. The paper recommends that interest- free movement in Less Developed Countries (LDC’s) assume greater strides in seeing that governments in LDC’s move towards eliminating interest in their budgets so that more public funds will be available for social infrastructure and less for debt servicing.

1.0INTRODUCTION

Interest – Ribah is a global phenomenon. In today economies, some policy makers use “Interest rate” to influence economic activities and intermediation. In conventional financial intermediaries interest – Ribah is the main source of funds, it appears that conventional economic theories neither guide nor form the basis of determining interest rate in banking industry and other business transactions.

Rather by the forces of “invisible hands”. However, despite religious and secular view prohibition of interest – ribah, interest – ribah are been technically advocated as an efficient way of allocating loanable funds.

In western literature, however, an artificial distinction is usually drawn between “interest – ribah” and usury”. Using two quotations; one from encyclopedias and the second one from a religious dictionary here illustrate and critique this irreverent sophistry, which has torpedoed religious commandments and, thereby, brought considerable woe upon humanity.

Under the entry ‘usury’, encyclopedia Britannica has this to say: Usury, in modern law, (is) the practice of charging an illegal rate of interest for the loan of money. In old English law, the taking of any compensation whatsoever was termed usury. With the expansion of trade in the 13th century, however, the demand for credit increased, necessitating a modification of the definition of the term. Usury then was applied to exorbitant and unconscionable interest rates. In 1545, England fixed a legal maximum interest; any amount in excess of the maximum was usury. The practice of setting a legal maximum on interest rate later was followed by most states in the United States and most other western nations. (Encyclopaedia Britannica 2002:)

Nelson’s new illustrated Bible dictionary; under the entry “usury”, this reference document, with its presumably religious credentials, or pretensions, wrote:

“Usury – [is] interest paid on borrowed money. In the Bible the word usury does not necessarily have the negative cannotations of our modern meaning of lending money at an excessive interest rate. Instead, it usually means charging of interest on money that has been loaned.

“The Old Testament prohibited charging usury to fellow Israelites; their need was not to become an opportunity for profit (ex. 22:25; Deut. 23:19-20; Neh. 5:1-13). However, foreigners were often traders and merchants, and usury was a part of their everyday lives. Thus they could be charged usury (Deut. 23:20).

“By the time of the new Testament, Israel’s economy had changed so much from Old Testament days that usury was common practice, even among God’s people. Therefore, Jesus did not condemn receiving usury.

“The concept of riba was widely recognized among the addresses of the Holy Qur’an, and it is that concept which is reflected in the legal definition provided for riba either in the Hadith or in the later literature of Islamic jurisprudence. According to this definition, any transaction of loan where the payment of an additional amount on the principal is made conditional to the advance of such a loan is called riba”.

So, It concurrently unlawful for a Jew to charge interest on loans to fellow Jews and lawful for him to do so when the loans are made to non-Jews, merchant and non-merchants alike. As for the discriminatory moral code, we posit that this runs counter to the general tenor of the old Testament on usury, and is inimical to the universal equality and brotherhood of humanity, anachronistic, and inconsistent with concept of one universal God before whom all humanity, in their essential nature, are equal; a God who does not discriminate on the grounds of congenital accidents of race, colour, or language but on the grounds of acquired merit of piety and virtues of good behaviour. No. Furthermore, the Noble Qur’an – the final testament, if you like – is emphatic that interest – taking was definitely forbidden for the Jews. [See An – Nisaa’ 4:161].

The Nelson’s dictionary has made some very serious statements: it says, Jesus did not condemn receiving usury. It is true that the New Testament has not reported any condemnatory statement from Jesus (peace be upon him) concerning interest [1].

But the Old Testament has done so, and, as we have seen in Mathew 5:15-20, the mission of Jesus (peace be upon him] was not to abolish but to fulfill the law of the prophets.

The argument here is that interest rate also vitiates the operation of monetary policy. This render long-term government planning almost impossible and worsens the climate of uncertainty in which economic decisions are taken, discourages capital formation and leads to a misallocation of resources, in public funds.

1As a matter of fact, the New Testament has not recorded all what Jesus (peace be upon him has or could have said. This could be correctly inferred from the four Gospels, which, generally, were not written earlier than sixty years after the ascension of Jesus (peace be upon him] and which, by their collective descriptive name, give no more than a synopsis of his life. It is immediately evident from the King James Version (Red letter edition) of the Bible, which shows, in red font, the actual words spoken by Jesus (peace be upon him] in the course of his ministry. These would scarcely fill a quire and, consequently, could not really and honestly be said to be a full record of all that he had said in his blessed life time!

The object apart from the harm interest does to religious faiths, its limiting impact on social sector allocations in developing countries is harmful to social welfare and so governments should eliminate debt from their public budgets.

Abolition of interest would be the only way to create a climate of rational expectations and a stable background for resource allocation by government, financiers, entrepreneurs and consumers.

2.0PROVISION OF INTEREST BY RELIGIOUS FAITH

In this section of the paper presentation, I begin with the Bible, because Christianity preceded Islam and followed by Qur’an and Sunnah1.

2.1INTEREST IN THE BIBLE

i.“Behold, the princes of Israel in you, every one according to his power, have been bent on shedding blood … you take interest and increase and make gain of your neighbours by extortion; and you have forgotten me, says the lord”. (Ezekiel 22:6-12). These verses reckon the taking of interest as heinous as pogrom is and regard, the practice as being tantamount to ‘forgetting the lord God!’

ii.“If a man is righteous and does what is lawful and right – if he … does not lend at interest or take any increase … – he is righteous, he shall surely live, says the lord God”. (Ezekiel 18:5-9).

The verse counts interest – free lending to categories of people: the rich and the poor, the Jews and the Gentiles alike, as a mark of righteousness and an assurance for the enjoyment of eternal life.

iii.“He who oppresses the poor to increase his own wealth, or gives to the rich, will only come to want”. (Proverbs 22:16).

This verse blames equally both the receiver and the giver of interest. More than that! The verse forewarns the poor who accept to give interest to the rich that this would only worsen his or her economic status. We shall see practical examples, when we consider the plight of the so-called highly indebted poor countries [HIPC’s] that have accepted, under the modern conventional banking practice, to sinfully

pay interest on the loans they have taken or cajoled to take from rich countries.

Sunnah represents the explanative practical actions, tacit approvals and verbal statements of the noble Prophet (S.A.W) as distinct from the Qur’an, which embodies the words of Allah

2.2INTEREST IN THE QUR’AN

Islam, in line with other major religions such as Judaism and Christianity also abhors and does not permit the taking of interest – in monetary transaction and in the exchange of commodities of the same species. It has forbidden the practice, condemned those who engage in it, and given notice of war from Allah and from the state to those who do not eschew it. “There must, therefore, be a powerful rationale”, argues Dr. Chapra, “behind this unanimously harsh verdict by the major religious against the charging of interest.

The validity of this rationale even today is clarified”.

i.“O you who believe! Fear Allah, and give up what is outstanding of interest, if you are indeed believers. If you refuse to do so, then take notice of war from Allah and his messenger. And if you repent (from taking interest), you shall have your principal sums; deal not unjustly and you shall not be dealt with unjustly. And if (the debtor) is in difficulty, (let there be) postponement to (the time of) ease. And that you remit the debt by way of charity is better for you, if you only knew it. And guard yourselves against a day in which you will be brought back to Allah. Then shall every soul be paid in full what it has earned and none shall be dealt with unjustly.” (Al-Baqarah 2:278-281).

ii.“O you who believed! Devour not interest, doubled and multiplied; but fear Allah, so that you may (really) prosper. And guard (yourselves) against that fire which has been prepared for those who disbelieve. And obey Allah and the Apostle, so that you might be graced with mercy”. (Aali Imraan 3:130 – 131)

RIBA IN THE HADITH

i.Narrated Jabir (R.A): Allah’s messenger (S.A.W) cursed the one who accepts usury, the one who gives it, the one who records it and the two witnesses to it, saying,” they are all the same. “[Reported by Muslim]. Al – Bukhari reported something similar from Abu Jahaifa’s Hadith. [Bulugh Al-maram kitab Ar-riba [USURY].

ii.From Abu Hurayrah: The Prophet (Allah bless him and give him peace) said, “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.” (Ibn Majah)

iii.From Abu Hurayrah: The Prophet (Allah bless him and give him peace) said, “There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him “(Abu Dawud, Kitab al – Buyu, Babfi ijtinabi al-shubuhat; also in ibn Majah).

In this discussion, why do religious faiths in general prohibit interest? The practice of giving and receiving interest is act of disbelief. Therefore, avoid interest, which negates faith and entitles you to the fire just like the unbelievers. As we have seeing from the religious excerpt.

Another point to notice is that, taking interest is an unjust way of wealth acquisition. It has, however here been singled out for the purpose of emphasis and underscoring its heinousness. Even though, the major concerned is how interest depleted our resources or funds meant for social services, (our budgetary allocation), and the lingering effects of interest to the modern times.

In this regard, analysis has shown that the religious faith has similar prohibitions as relate to interest charging in all ramifications.

3.0SOME HARMFUL EFFECTS OF INTEREST

3.1HARM ON NATIONS

A number of objections have been raised against the prohibition of riba (interest) in many religious and it has been alleged that a riba – free economy will face so many problems that it may not be able to survive. Many LDC’s are a living example of the debilitating effects of interest – based finance. Most sadly reflected in just about every LDC’s country in the world, with daily ballooning interest payments to the world Bank, IMF, and other industrialized nations’ agencies; notably, at low rates of interest. Interest payments that, quite unproductive, draw valuable funds away from healthcare education, sanitation, infrastructure, and any number of other governmental responsibilities. Debt creates dependence, and dependence provides the opportunity for control.

The following two passages are particularly relevant for understanding the effect of interest: “According to UNICEF, over 500, 000 children under the age of five died each year in Africa and Latin America in the late 1980s as a direct result of the debt crisis and its management under the International Monetary Funds Structural Adjustment Programs. These programs required the abolition of price supports on essential food-stuffs, steep reduction in spending on health, education, and other social services, and increase in taxes. The debt crisis has never been resolved for much of Sub-Saharan Africa. Extrapolating from the UNICEF data, as many as 5,000,000 children and vulnerable adults may have lost their lives in the blighted continent as a result of the debt crunch”.1

1Buckly, Ross, “The Rich Borrow and the poor Repay: The fatal in International Finance”. World policy journal (2002/2003)

“Debt is an efficient tool. It ensures access to other peoples’ raw material and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exports income to a bare minimum while the North enjoys huge savings.

The IMF cannot seem to understand that investing in … Healthy, well–fed, literate population … is the most intelligent economic choice a country can make”.1

Beside, interest. Just as it wreaks havoc on the lives of individuals, so it does, on an even larger scale, on many a company and many a nation state. Here are some statistics2, the use of this statistics is for the purpose of showing devastating negative effects of interest servicing.

·Mozambique spends ten times more on debt repayment than it does on healthcare;

·The latest statistics, but here are use for the purpose of showing devastating negative effects of interest serving.

·Uganda, where one in five children die before their fifth birthday because of preventable diseases, spends five times more on debt than it does on healthcare;

·Somalia’s debt is nearly four thousand times its annual export earnings; that of Sudan is more than two thousand times, and that of Rwanda is about one thousand four hundred times its annual export earnings.

Clearly, these countries can never succeed in fully repaying these debts, but they will certainly be inhumanly impoverished as they attempt to repay.

·Funding universal primary education in Africa would require approximately an additional $3 billion; the region currently spends $ 12 billion on debt repayment;

·The annual costs of repayment and servicing debts are far in excess of the annual aid that developing countries received. Developing countries paid back $13 for every $1 they received in grants in 1998, up from $9 in 1996;

·The international monetary fund received $1 billion more in loan repayment and servicing than it gave to Africa in 1997 and 1998; that is Africa has been enriching IMF!

4.0EFFECTS OF DEBT REPAYMENT WITH INTEREST TO NIGERIAN ECONOMY AND LOCAL ENVIRONMENT

In relation to Nigeria let start by the quotation of President of Nigeria in the previous regime a paper presented at G8 Summit, the quotation are:

“All that we had borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what the worst thing in the world is, I will say it is compound interest”.

President Obasanjo of Nigeria, G8 Summit, Okinawa, 2000.let us focus our attention for a while on the havoc of interest on our country: its peoples and economy, and its future generations.

What injustice could be greater than interest?1 In an article published on page 26 in the bronze (December 2002) anniversary edition of a journal of the Britain Nigeria Business council – formerly, Nigeria British chamber of commerce – Akin Arikawe,

The director general of the Nigerian debt management office wrote:

“Nigeria’s … External debt stock, which was less than US $1 billion in 1970, has averaged US $30 billion over the period 1980 – 1990. At the end of December 2001, it stood at $228.25 billion “Nigeria’s huge debt burden has grave consequences for the economy and the welfare of the people. The servicing of the country’s external debt has severely encroached on resources available for socio – economic development and poverty alleviation.

Between 1985–2001, Nigeria spent over US $32 billion in external debt servicing. Prior to the October 2000 rescheduling arrangement with the Paris club creditors, annual debt service payments due were in the range of US $3.0 billion to US $ 3.5 billion. In 2001, actual debt service payment was US$2.1 billion, which amounted to six times the budgetary allocation to education and 17times2 the budgetary allocation for health for that year”.

1The entire budget of the federal Government of Nigeria for 2006 was N1.88 trillion. our government, without consultation, without prior announcement of its intention in an election manifesto, took N 1.68 trillion and paid it over to our alleged foreign, European creditors in settlement for a loan that we had already paid times over by way of interest payment.

2The comparative figures may well have been based on the official exchange rate; if then prevailing market driven exchange rate was used the ‘six and the seventeen times’ he has quoted would probably have been about 40 and 100times the respective budgetary allocations he has spoken about!

“Never in the history of humankind’, report weekly Trust, ‘have so many countries owed so much money with so little prospect of ever getting out of debt. The total amount of international debt owed by the third world nations amounted to just over $100 billion in 1973. By 1997, it stood at a staggering sum of $2trillion.

In fact, only about $400billion of the $2trillion was actual borrowed finance capital; the rest was runaway compound interest1. No wonder that we are poor!

The question is not how these countries got themselves so heavily indebted, or what they actually did with the loans when they eventually got them; the question is why did their creditors extend the loans to them in first place knowing very well, as the putative financial wizards of this world, that these countries would never be in a position to pay back?

In relation to this, Bible says: “He who oppresses the poor to increase his own wealth, or gives to the rich, will only come to want.” (Proverbs 22:16)

Qur’an says: If a debtor is in difficulty grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you, if you only knew’. (Al-Baqarah 2:280).

Notice how the underlying debt burden (Table 1 in $ and Table 2 in N) remains sharply fluctuating (at about $501billion) on the nation‘s neck over the five – year period. This is about 95% of the country’s gross domestic product. ‘This amount is about 70 to 80% of total exports, hundred times the national education budget and two hundred times the public health budget’ of the country’s estimated 140million people! The actual debt itself is irrelevant; it is the constant, free, guaranteed, and endless flow of interest income that it provides to western economies which is important to us.

Following the rescheduling of our debt to the Paris club of creditors, the country is expected to commit some $2.5billion annually in interest payment over the twenty year moratorium period. This annual amount ‘is higher than the combined budgetary allocation for health and education in the 2014 budget. Nigeria’s original borrowing from Paris club was $13billion. The country has paid a total of $17billion so far, and still has an outstanding debt obligation of $22billion.2

Besides, this huge amount that the western countries collecting from Nigeria public funds, clearly indicate the injustice of compound interest, especially in line with servicing of these debt as compared with what Nigerian budget allocated to education and health care to mention few, are less pronounce.

The UK chancellor of the exchequer, Gordon Brown, is reported to have said that debt is ‘the greatest single cause of poverty and injustice’.

What he probably had in his mind but did not have the courage to mention it by name was interest; he therefore had neither guided by religion, nor moved by conscience.

5.0THE HARM OF INTEREST ON SOCIAL LIFE AND PUBLIC MORALITY

There are vices other than economic that are associated with interest. These include false returns to the regulatory authorities, insider dealings and abuses, gratification to avoid or overlook imposition of penalties, and pervasive corruption of social life and public morality which manifests itself in the form of laziness, avarice, insensitivity, and selfishness.Conventional bank workers may not readily admit it but they very well know about the existence and prevalence of the corrupt practice whereby public servants, for a fee, deposit millions from the financial resources of their ministries and departments with banks that are weak or terminally ill. Several public institutions have lost their deposits to failed banks in this way.

However, foreign embassies have been alleged to have placed students’ allowances on fixed deposit accounts in order to earn interest and are unwilling to break the deposits even when such allowances have become due for disbursement to the helpless students. Similarly, pilgrim boards and agencies have been alleged to do likewise with fare monies deposited in advance by intending pilgrims and are unwilling to break the deposits in good time to charter aero planes that would, airlift the helpless intending pilgrims. The results are the delays, the confusion, the sufferings, and the failure to convey the pilgrims to Saudi Arabia before Jedda airport is closed. This pattern is equally applied to pensioners’ funds, because of interest accruals.

This has become annual ritual with no solution yet in sight because of the easy money that interest allegedly provides some public servants.

Writes Dr. Al-Qaradaawee …spread of interest is evidence of the corruption of economic life. .…interest reflects and confirms the underlying Malaise of lack of selfless co-operation between those endowed with capital on the one hand and those endowed with skills and entrepreneurship on the other. The result of this lack of co-operation between labor and capital is that one would always and forever be scheming to deceive, combat, and steal from the other. What earthly divine punishment could be greater than this a society that is divided against itself!1

1Fawaa’ id Al-Bunook Hiya Al-Ribaa Al-Haram

6.0CONCLUSION:

Financial intermediation on the basis of interest frustrates the realization of the humanitarian goal of general need fulfillment of individuals, full employment, equitable distribution of income and financial resources, and economic stability. It allocates financial resources among borrowers on the criteria of their ability to provide acceptable collateral to guarantee the repayment of principal and sufficient cash flow to service the debt.

The rich do not, however, borrow primarily for productive investment. They borrow also for conspicuous consumption and speculation. Even the government do not borrow mainly for development and well – being. They borrow also for excessive defence build – up and unproductive public sector projects. Interest – based financial intermediation thus makes it possible for both the public and the private sectors to borrow for unproductive purposes and to live beyond their means. This does not only accentuate macroeconomic imbalances and instability, but also squeezes the resources available for investment and need-fulfillment. Reduced investment contributes to slower growth and slower rise in employment opportunities.

Islam, therefore, prohibits interest like other major religions, and organizes financials intermediation on the basis of profit and loss sharing. The financier is not assured of a positive rate of return. His return is linked to the ultimate outcome of the business financed. Financing may not then become available for any purpose just because the borrower has acceptable collateral to offer and sufficient cash flow to service the debt. It may rather become available primarily if the financier feels confident that the project is worthwhile and the entrepreneur has the necessary ability to manage it efficiently. In this case, financial resources may not be available for unproductive uses and may not necessarily flow to the rich. Even poor entrepreneurs may be able to qualify if they have worthwhile projects and the necessary integrity and entrepreneurial ability to manage them. This can help in the realization of society’s humanitarian goals.

6.1RECOMMENDATIONS

As I mention earlier in the introduction that the object of the paper, interest rate impaired budgetary allocations especially in social sector and harm to religious faiths, at the same vain Islamic models were proposed. Considering the quotation of president Obasanjo at G8 summit in Okinawa in 2000, but everyday numerous countries find themselves in the same predicament as Nigeria. UNICEF estimates that over half a million children under the age of five die each year around the world as a result of the debt crisis.

Now how would Islamic finance handle thing differently? Using the $5billion example, Islamic banks could provide $5billion of financing for infrastructure, literacy, healthcare, or sanitation programs, to name a few. Here are the models:

·An Islamic bank could have arranged for the $4billion construction of a natural gas pipeline and delivered it to Nigeria for $5billion. Using an Istisna.

·Or taken an equity stake in a highway project and shared in profits and losses using Musharakah or Mudarabah.

·Or purchased commodities and sold them at a premium using a Murabaha.

According to scholarly consensus, this ruling applies equally in a fiat currency environment. For further reading, Mufti Taqi Usmani’s “Text of the Historic Judgment on Interest” provides excellent responses to common arguments in favor of commercial interest; the entire text is available at http://www.albalagh.net/Islamic_economics/

“Banks and Banking.” Encyclopaedia Britannica. 2005.

Gibbon, Edward. The Decline and Fall of the Roman Empire. New York: Random House Everyman’s Library, 1993.